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Sanctions and Anti-Money Laundering Bill [HL] - Committee (3rd Day) (Continued)

Part of the debate – in the House of Lords at 9:00 pm on 6th December 2017.

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Photo of Baroness Bowles of Berkhamsted Baroness Bowles of Berkhamsted Liberal Democrat 9:00 pm, 6th December 2017

My Lords, my noble friend Lady Kramer and I gave notice that this schedule should not stand part of the Bill. I would like noble Lords to take a few moments in private to give the schedule the “read it out aloud” test. Let us try one bit of it now. Paragraph 4 says:

“Require prescribed persons to take prescribed measures in relation to their customers in prescribed circumstances”.

All the prescribing is yet to be defined. I am sorry to appear light-hearted, but I can imagine that coming out of the mouths of comedians. Truly, I do not know whether the schedule is sinister or whether it just fails to understand how the money laundering regulations 2017 work. It is sinister if you look at the scope of the powers, which gives opportunity for boundless increase in who can be covered and ignores any proportionality or safeguards that are included in the current law.

It is no use pointing to the reference to the current regulations, which appears in paragraph 20, because that is basically there only to give power for them all to be rewritten, amended or revoked—so there are no guarantees for anything. It is worth having a quick look at paragraph 20, which starts:

“Without prejudice to anything in section 41, paragraphs 1 to 19 or section 44(2), regulations under section 41 may”.

We have to remember that Schedule 2 starts:

“Without prejudice to the generality of section 41”.

So we have a paragraph that starts with three mentions of “without prejudice”, reinforcing that a whole lot of other stuff is expected to be going on. Paragraph 20 then says:

“(a) subject to any modifications the appropriate Minister making the regulations considers appropriate, make provision corresponding or similar to any provision of the Money Laundering Regulations 2017, as those Regulations have effect immediately before they are saved by section 2 of the European Union (Withdrawal) Act 2017; (b) amend or revoke the Money Laundering Regulations 2017”.

It says that you can make provisions corresponding or similar or revoke. If that, together with the three references to “without prejudice” is not giving notice that you intend to completely rewrite them, then I really do not know what is. This is, as I have said before, a big part of the problem. It is sinister when looked at that way.

There is also a failure to understand, or at least to commit to, how the money laundering regulations 2017 work. That misunderstanding or failure to acknowledge is there by virtue of the very structure of Schedule 2. It is upside down, starting with the person, moving on to supervisors and leaving out duties of government. It does not seem to appreciate the cascade of risk assessment that drives automatic updating of the nature of risks from the Treasury and Home Office, to supervisors and then on to the persons. The list of powers seems to have been composed by lifting a short part-sentence here and there from individual sub-regulations, ignoring any safeguards including, as I said, the surrounding cascade methodology. The part-sentences are then turned into a list of naked powers that have already received criticism from the Delegated Powers Committee in paragraph 36 of its report. I commend reading that paragraph to noble Lords; it highlights and criticises the unrestricted power over persons, the powers to create supervisors with investigatory powers, the powers to prohibit the carrying on of business and power to impose unlimited fines and criminal offences—all without limit save for the sentencing limits.

It would stretch your Lordships’ patience, especially at this hour, if I went through each paragraph to show its origins and what is missing—although I could do that, if noble Lords wanted. I will just illustrate the pattern with one paragraph but, as I have said, it is a repeating pattern. Paragraph 2(1) requires “prescribed persons”—the yet to be defined prescribed persons—

“to identify and assess risks relating to money laundering, terrorist financing and other threats to the integrity of the international financial system”.

That actually sounds like a pretty good definition of what the Financial Action Task Force was set up to do. The Minister can by regulation make anyone—some small accountant, lawyer or bookkeeper, you, me, the doorkeeper, a schoolteacher—do it all, not forgetting unlimited fines for getting it wrong. Am I being ridiculous? Well, no, because there is no mention of the category of person or it being about their own or a relevant business. Where does this wording come from? Let us look at Regulation 18(1) of the 2017 regulations, entitled:

“Risk assessment by relevant persons”.

It starts:

“A relevant person must take appropriate steps to identify and assess the risks of money laundering and terrorist financing to which its business is subject”.

Spot the missing bits. It has to be “appropriate steps” relating to its own business. The “relevant person” is not open-ended either, because there is a list of relevant persons in Regulation 8.

What else is missing? Rather a lot; that is why the 2017 regulations are 118 pages long—and yes, there are flags in my copy, because I kind of know what is in there. What else is missing? Even within that same Regulation 18, paragraph (2)(a) says:

“In carrying out the risk assessment … a relevant person must take into account … information made available to them … under regulations 17 … and 47”.

Regulation 17 is about the supervisor’s risk assessment. Regulation 47 gives supervisors an obligation to provide information to those they supervise. I think that is a pretty good thing for them to do. Going back to Regulation 18, paragraph (2)(b) gives a non-exhaustive list of risk factors to include, such as customers, countries of operation, products and services, transactions and delivery channels. Paragraph (3) states:

“In deciding what steps are appropriate … the relevant person must take into account the size and nature of its business.”

If we zoom out to other parts of the 2017 regulations, noble Lords will find that the “relevant person” in Regulation 18 does not have to work out the risk factors and proportionality all by themselves. There is guidance from their supervisors in the cascade. In fact, the cascade under the 2017 regulations starts with the Government making risk assessments, which feed in to supervisors, who refine or add their own sectoral information and then provide, under a duty, guidance to the entities they regulate. None of that is anywhere near being included in Schedule 2.

For the self-regulating sectors, the professional bodies that act as supervisors—there is a list of 22 of them in Schedule 1 to the 2017 regulations—can get the guidance they are going to give to the entities they supervise signed off by the Treasury. That is another safeguard, especially when we consider that at the end of all this lie unlimited fines and potentially criminal offences.

The cascade, the duty to inform and proportionality are all essential elements. It is simply not good enough to give them no status. Also, the cascade already gives massive scope for update because of the ongoing requirement in the 2017 regulations for the Treasury and Home Office to,

“identify, assess, understand and mitigate the risks of money laundering and terrorist financing”.

That is the start of Regulation 16, and at the end of that regulation, in paragraph (9), it says that the risk assessment is to be kept up to date. That, indeed, is also the first requirement of FATF recommendations.

To recap, under Regulation 16 there is government risk assessment, under Regulation 17 supervisors do follow-on assessments for their sector, and under Regulation 18 the relevant person does their risk assessment. So the mechanism is already there for top-down automatic updating, and it includes essential safeguards like proportionality and provision for how procedures can be approved. That is essential to try to get businesses on board and—I say it again—to make sure that they get their internal audit procedures functioning in a way that everybody agrees is right.

In contrast, instead of better referencing to this sequence and context, Schedule 2 to the Bill provides a bottom-up list of powers to make anyone responsible for anything, with the creation of supervisors, oversight and inspection disembodied from who it might be for. It leaves out provision for government duties, proportionality, and, again, the cascade.

So what does Schedule 2 intend to achieve that might be necessary and is not already achievable? It is not new risks because they are in the risk assessment cascade. The Government can put in anything they identify as well as mitigation requirements. It can only be to widen the scope to more business categories that do not already fall within the list of relevant persons in Regulation 8, and the supervisors of those businesses. Therefore, will the Minister advise what businesses those might be other than virtual currencies and wallet providers already included in the ongoing update in the fifth money laundering directive, and for which I understand the Government also have their own plans?

Can the Minister also advise whether the UK would go it alone to designate additional business categories without international agreements? What kind of businesses might those be? Is he able to advise whether change is envisaged—for example, to supervision of self-regulated professions, and, if it were, whether that is a matter to slip through in a regulation? Self-regulated professions are a very strong thread in the United Kingdom. I ask this as there is a lot of supervisor creation power going on in Schedule 2.

Why are the Government paving the way potentially to do away with the backbone of the cascade and proportionality, because, as I read out, there can be no mistaking that paragraph 20 is about the serious business of rewriting everything that is there, leading to massive uncertainty for business? That is the only reasonable interpretation to put on the continual reiteration of all those powers.

On any reasonable assessment of Schedule 2 as updating who can be included, it is a sledge-hammer to crack a nut, but with sinister consequences. Surely, all that is necessary is a modest provision to update the 2017 regulations in accordance with international recommendations, including power to add new business categories and their existing supervisors into the framework that already exists. Even if the framework were more narrowly described, it is not that difficult; I think that I could write it. I have broadly suggested this kind of approach in other amendments, but there will be other ways to achieve it. If a major rewrite is really wanted, or the nature of additional businesses that it is wished to cover are currently structured without any, or any appropriate, supervisors, and the Government are going it alone separate from international consensus, those are the kinds of things that are getting into the territory that belongs in primary legislation.

Thus, Schedule 2 is neither needed in its current scope nor appropriate and, as has been debated already, it further expands the basis to make unlimited new criminal offences without any reference to safeguards or basis. In this context, as I have said before, the criminal offences that were introduced by regulation mirror some that are already in other Acts of Parliament concerned with money laundering, such as the Proceeds of Crime Act, so they are not completely off the wall. In Schedule 2, you can now have them completely off the wall with no antecedent anywhere else in any primary legislation.

Finally, as I think the Minister has said previously, the fifth money laundering directive is expected to be finished and transposed before Brexit, and, I now understand, will be transposed by virtue of this Bill, when it becomes an Act, rather than through the European Communities Act. There are potentially more intrusive provisions within that fifth money laundering directive, which bear on individuals. Currently, they are bounded by the European Charter of Fundamental Rights. When I last looked, that was one of the conditions that the Council was writing into its version, which is in trilogue. How will this be taken into account when we have abolished the Charter of Fundamental Rights? I understand there are things in it, especially those impacting on immigration and so forth, that the Government do not like—although we on these Benches think the whole charter is a jolly good thing—but are we really saying those aspects that bear on Treasury implications and how you deal with out-and-out civil liberties will all be gone?

This is yet another reason why having such an extensive ability to rewrite, such naked powers to introduce things without safeguards, is unacceptable. A little more homework needs to be done so that this remains properly framed, whatever rewrites may or may not go on.

Finally, I ask the Minister to make sure that, when regulations on money laundering come around again, Parliament is not given only a matter of days to scrutinise them.